If your broker or financial advisor did not significantly reduce your exposure to stocks before the latest purge in the Dow, he or she should be immediately fired. There is simply no excuse.
The financial services industry may be trying in desperation to convince you that there was no way to know what was coming, but there is simply no justification for dropping the ball. Those that should have known better did not.
It is nothing short of failing in the fiduciary responsibility to protect the interests of their clients. No matter what your age, risk profile or investment objective, owning stocks in the midst of the worst financial crisis since the Great Depression made little sense.
Given that the financial services industry itself was in the center of the storm, those on the frontlines supposedly protecting their clients should have seen this coming. It was staring them in the face and most of them still missed the boat.
If your broker or advisor was in this group of lame brains, they should be fired immediately. You deserve better representation.
Their frontline argument about buying and holding stocks in a diversified portfolio does not hold water in these historic circumstances. According to this defense, reallocating stocks in reaction to fluctuations in the market is a sure way to lose money.
They say you can’t time the market so why bother trying. You know the blather, sit on the sidelines when the market makes its biggest moves higher and your portfolio will ultimately under perform. Therefore, it is far better to just stay invested.
In most cases they are right, but in this situation that line of thinking makes little sense. While it is indeed impossible to time the market, there are moments when stepping to the sidelines can protect and ultimately enhance your returns.
There are many ways to apply this axiom. Many brokers and advisors do indeed follow asset allocation strategies that are adjusted at different times for varying reasons. If that is the case then such a manager would have surely adjusted your allocations in the week that followed the collapse of Lehman.
If you recall, stocks actually finished higher that week allowing plenty of time to implement a change in allocation strategy and certainly there was every signal to suggest that a potential landslide was upon us.
Think of it this way: if you are in a crowded theater and someone yells fire, is there not a time when it makes sense to run?
As far as the market is concerned the collapse of Lehman was the equivalent of a four alarm fire. Investors should have been running for the exits. The stunning fact that they did not tells me the true indoctrination of buy and hold stock investing.
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It was only after stocks dropped hard that we saw mutual fund outflows grow appreciably. That is like waiting for the burn before running from the fire. It is truly astounding.
On September 29, 2008 I wrote that it was not too late to sell. At that time, the market had barely moved in the aftermath of Lehman failing, AIG being bailed out, and Merrill Lynch being sold. Add in a $700 billion proposed government rescue package and the ingredients were in place for lower stock prices.
I hardly believed I was panicking in any way. I was simply suggesting that a rational discounting of stocks would be necessary given the monumental changes taking place in the credit market. Most important was that the credit markets themselves were priced in a way suggesting Armageddon.
Stock valuations did not jibe to that reality. It was a fairly simple call to make and if you could not see the writing on the wall yourself, your broker or advisor should have.
Of course the financial industry is now skewed to keeping investors committed to the market. Gone are the days of compensation based on trading. In its place is a system where the broker simply gets paid if your assets are deployed in the market.
In other words they don’t make as much money if you are sitting on the sidelines. While they are supposed to be your advocate, never forget that there is a huge profit motivation to their actions.
In the case of buy and hold strategy they have the perfect cover for keeping you in the market in a way that ensures that they get paid.
Investors need to be smarter than this thus the last month or so has provided a great test for your broker advisor. Did they pass or did they fail?
In my humble opinion if they did not reallocate your portfolio in early October, they failed. You should immediately find a broker or advisor that was able to nimbly react to this current crisis.
Those that made that call are more likely to out perform other brokers or advisors going forward.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com and check out:
